Bill 198 brings brawn to Act

There is little doubt that the crisis in confidence that has roiled U.S. markets in the wake of Enron, WorldCom, Global Crossing and other failures has spilled across the border into Canada. U.S. governmental and regulatory authorities have taken swift measures to correct the systemic failures exposed by these scandals. But we have essentially the same market system here in Canada, and we’ve had our own share of failures.

What is to be Canada’s response?

The measures introduced in Bill 198 will greatly assist in restoring investor confidence to our capital markets.

The amendments to the Ontario Securities Act introduced in Bill 198 were drawn largely from the work of a 5-year review committee. Consequently, all the measures have benefitted from a great deal of consultation and careful consideration.

New violations in the act include: securities fraud, market manipulation and making a misleading or untrue statement.

Incredibly, these activities are not specifically prohibited in the existing Ontario Securities Act. Market manipulation is an offence under the British Columbia, Alberta and Saskatchewan statutes and is a securities law offence both in the U.S. and the U.K. The British Columbia and Alberta acts also specifically prohibit fraud. Although we have the authority to deal with this activity under our broad public-interest jurisdiction, it is so fundamental that it should be enshrined in the act.

Bill 198 also gives the Ontario Securities Commission (OSC) two new administrative sanctions: the authority to levy an administrative penalty of up to $1 million, and the ability to order disgorgement of profits made as a result of a violation of Ontario securities law. These will be added to the arsenal of sanctions that can be imposed in a section-127 proceeding.

Much has been said about the extent of our powers under this section. Justice John Laskin made it clear in the Asbestos decision (a ruling that upheld a 1984 OSC decision to pay nothing to 1,300 minority shareholders of Asbestos Corp., many of whom lived in Ontario, after the Quebec government nationalized the province’s asbestos industry) that the purpose of our public interest jurisdiction is neither remedial nor punitive; rather, it is protective and preventative — intended to prevent likely future harm to Ontario’s capital markets.

In upholding Justice Laskin’s decision, Justice Frank Iacobucci noted that it is important to recognize that section 127 is a regulatory provision and that the objective of regulatory legislation is the protection of societal interests, not the punishment of an individual’s moral faults. He stated: “The purpose of an order under section 127 is to restrain future conduct that is likely to be prejudicial to the public interest in fair and efficient capital markets.”

Some practitioners have expressed concern that the power to impose a fine crosses the line from preventative to punitive — thereby rendering it unconstitutional. I disagree.

To put it in Justice Iacobucci’s terms, the issue will turn on whether the administrative penalty is seen as punishment for the individual’s moral faults or is seen as a sanction imposed to restrain future conduct. Properly applied, I believe, the power will be construed to be preventative.

The authority to order disgorgement is a first for a Canadian securities regulator. The principle behind it is compelling: Why should a person or company be allowed to keep monies that were made as a result of a breach of the Securities Act? This is a progressive step that puts us on a par with the U.S. But the devil is in the details. How will disgorgement work in practice? How will the amount of profit be determined? What guidelines will be in place to decide who gets what? Candidly, we still have a great deal of work to determine how best to implement this measure. The U.S. Securities Exchange Commission (SEC) has enacted rules of practice governing their determination of entitlements to disgorged monies, and we are examining these rules for ideas. We will also work closely with market participants and ministry officials to provide as much clarity as possible.

The Securities Act does permit the courts to assess remedial or punitive penalties, notwithstanding the limitations discussed above on the commission’s direct powers of sanction. As Justice Iacobucci put it in the Asbestos appeal, “The enforcement techniques in the Act span a broad spectrum, from purely regulatory or administrative sanctions to serious criminal penalties.”

Here, punishment and deterrence are legitimate objectives.

The Five-Year Review Committee found that the general penalty provisions of the act hadn’t been changed for 15 years. It also found that potential prison terms in other jurisdictions were much longer that ours — ranging from three to 10 years. The committee concluded that the maximum fine under the general penalty provision should be sufficiently large to be viewed as more than simply a licensing fee. Thus, the committee recommended increases in both the fines and jail terms that can be levied by a court.

Under Bill 198, the maximum court-imposed fine rises to $5 million from $1 million, while the maximum jail term increases to five from two years. For insider-trading cases, the court continues to be allowed to impose a fine of up to three times the profit made or loss avoided. With Bill 198, the Legislature has sent a strong signal to the courts that stiffer sentences are needed for violations of the Securities Act. This signal from our lawmakers is needed. Courts still view a proceeding under the Securities Act as an administrative proceeding, notwithstanding the provision of criminal penalties. As a result, even for the most egregious conduct, penalties are often set at or below the mid-point in the specified range. If the courts respond positively to this signal from our legislators, we should have a clear deterrent message to potential miscreants.

In his recent budget, federal Finance Minister John Manley announced that increased federal resources will be made available to combat criminal activity in our capital markets. There are two components to this funding. The first is for investigations. New funding will be earmarked for the Royal Canadian Mounted Police to hire and train sophisticated investigators with the knowledge to identify and investigate complex securities fraud. Among other things, this funding will allow us to expand our existing successful partnership with the RCMP.

The second element is to increase resources for criminal prosecutions. The federal government has not yet announced how much more aggressive it is prepared to be in taking securities-related cases to court. But even with a greater commitment, it will take some time for the feds to ramp up their resources.

Although these new signs are positive, it will take some time before certain fundamental questions are answered. For example: Is there a greater desire among municipal, provincial and federal police to make securities-related crime a higher investigative priority? If so, is there a will at the provincial and federal levels to prosecute these cases? Also, is there a role for OSC litigators to play in prosecuting criminal code cases?

These are all questions with which we’ll be wrestling in the coming months.

— The preceding is from a speech presented to the Law Society of Upper Canada in March 2003. The author is chairman of the Ontario Securities Commission.